Instead of controlling its spending, therefore, the populist government that has exhausted its ability to borrow domestically turns to foreign lenders to finance it. Thus the circumstances in which foreign loans are made are not propitious. Knowing this, foreign lenders demand protection, which the government can typically give only by eroding the rights of existing domestic creditors—for instance, the more the overindebted government borrows in foreign currency, the higher the inflation it will eventually have to generate to erode domestic-debt claims on it. Moreover, because foreign
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developing country households save a lot (and don't spend) because they have no safety nets. thus also reluctant to invest in their govt's debt. cash strapped, govt turns to foreign lenders who have strict terms because of the risk, including repayment in foreign currency. then use inflation to reduce cost of domestic debt (further reducing likelihood of domestic enders) and become heavily dependent on foreign lenders, run big deficits. difficult to get out of and run risk of foreign lenders turning off spigot suddenly (often loans have short durations, plus lender may be enticed by lending in their own economies if interest rates happen to rise there).
